Internet stock trading has soared in popularity recently – but most investors still are not well versed in how to find the best online broker for their needs.
Finding an online broker may seem easy. Nowadays, all the resources you need are at your fingertips, 24 hours a day, seven days a week. There are many reputable sites that have become household names.
While you may recognize the E*Trade (Nasdaq: ETFC) from the catchy commercials it runs during the Superbowl, you might find you fall short of actually knowing if E*Trade is a good broker for you.
When it comes down to it, selecting an online broker requires some serious thought. Several factors must be weighed, and what is good for your neighbor, brother, or co-worker might not be the best option for you.
These brokers provide a service, but a personal one; it is more akin to choosing a doctor than choosing a restaurant or drycleaner.
Here is a three-step breakdown of what to consider when picking the best online broker for you:
#1: Investment Style
Time for some soul-searching! Your particular investment style is extremely important in determining which online broker you select.
Before you choose an online broker, ask yourself the following questions:
- Priority: Are you someone who wants to trade frequently and really "play the game"? Or would you prefer to make a few long-term investments?
- Service: Do you want the convenience of a full-service Website, where you can invest, pay bills, and house a checking account?
- Information: Are you looking for the most up-to-date and large collection of investment research?
- Attention: Do you want the best customer service and hand-holding, or do you expect to do everything on your own?
- Accessibility: How about Website ease-of-use? How smooth does the platform run? How much time, if any, are you willing to put in to figure it out?
Once you've got a handle on your individual investment style, pay attention to the layout and marketing as you shop around. You don't drive a car off the lot until after the test drive.
If the site seems to have the right mix of research, ease-of-use, customer service, cost, etc., and with the right priority, you've likely found a good fit.
Perhaps the biggest consideration for many investors is just how much this will cost.
Take a look at commission rates. Some online brokerages require a minimum account balance, and the commission rate varies with that balance.
For instance, you will get lower commissions if you keep a certain minimum account balance. Also, you may be charged fees if the balance isn't met at all times.
Kara Stefan of MsMoney.com writes, "As a general guideline, the more advice and information you need, the more you may want to pay out to help ensure that you avoid poor investment decisions."
Last but not least, be sure to look at any "hidden" fees or rates built in to the process. This is definitely an area where you will want to read the fine print.
#3: Legitimacy and Reputation
The last thing you want is to be spammed or scammed. Make sure you are dealing with a reputable online brokerage firm.
Check out the online broker's privacy and security policies – more fine print, but worth the read.
Additionally, your local securities division can verify an online broker's registration status and disciplinary history, according to Businesspundit.com.
Finally, take the time to do some research by reading reliable reviews of online brokers. Here's a summary of some of the big ones.
How to Choose an Online Broker: The Reviews
There are several sources for finding reliable online broker reviews, including Barron's, Stockbrokers.com, and Kiplinger.
In March 2012, Barron's came out with its fantastic 17th annual ranking of online brokers.
"We evaluated 27 firms, focusing on what they have to offer for wealthy, active traders," wrote Theresa W. Carey.
"We evaluated these rivals across eight categories, looking for what can be traded online, how the tools work together across platforms, the design and capabilities of mobile platforms, educational offerings and customer service, and the nuts and bolts of placing and executing a trade," said Carey.
Barron's rated brokers on a five-star system, handing out four-and-a-half stars (the highest earned in 2012) to Interactive Brokers (Nasdaq: IBKR), MB Trading, tradeMONSTER, and TradeStation.
Interactive Brokers landed on the top of the list – thought with a caveat. This service is geared toward frequent traders, and accounts have a minimum opening balance of $10,000.
But its services far outweigh its limitations, according to Barron's. Its portfolio analysis and tax accounting features outshine the competition and make trading easier for investors. It also offers a great iPad app and low commissions and fees.
Barron's also broke down brokers in categories, depending on your needs.
- Best for Frequent Traders: TradeStation; Interactive Brokers; MB Trading; Lightspeed Trading.
- Best In-Person Service: Scottrade; Merrill Edge; Charles Schwab; Fidelity; TD Ameritrade.
- Best International Traders: Interactive Brokers; TradeStation.
- Best for Long-Term Investing: Fidelity; TD Ameritrade .
- Best for Novices: TD Ameritrade; Fidelity; E*Trade; Charles Schwab.
- Best for Options Traders: tradeMONSTER; OptionsHouse; TD Ameritrade.
Back in February, Stockbrokers.com released an Online Brokers Review for 2012. It broke down its ratings based on: 1) Commissions & Fees; 2) Ease of Use; 3) Platform & Tools; 4) Active Trading; 5) Research; 6) Customer Service; 7) Investor Communities; and 8) Education.
In its overall rankings, Stockbrokers.com placed TD Ameritrade on top, followed by E*Trade, optionsXpress, Scottrade, and Charles Schwab.
Kiplinger has yet to release 2012 rankings, but its comprehensive 2011 breakdown is helpful.
According to Senior Associate Editor Elizabeth Ody, "We surveyed 14 of the biggest and best brokers in the industry to see which ones make your money go the furthest."
Kiplinger readers cited commissions and fees as a huge concern when choosing an online broker, but an easy-to-use Website and a wealth of investment choices were also very important.
Fidelity and TD Ameritrade topped the Kiplinger list. Both scored highest in Website usability, array of investment choices, and research and tools.
E*Trade ranked third overall, but had higher scores than Fidelity and TD Ameritrade in costs and customer service.
Vanguard took fourth, with wonderful marks for costs, but somewhat lacking in research and tools.
Kiplinger recommends Charles Schwab as a good online broker "if you invest primarily in no-load mutual funds." It lost out on ranking due to poor reviews in customer service.
For a full Kiplinger list of 2011 rankings, click here.
Now you will be capable of making an informed decision on how to find an online broker that is best for you.
Make your choice, and happy investing!
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